Confused by ULIPs? Let Us Help You Out!

 

 In this policy, the investment risks in the investment portfolio is borne by the policyholder  

While life insurance still predominantly rules the market, the Unit Linked Insurance Plan (ULIP) is a relatively new concept. Many people still don’t have clarity about its offerings. Besides, many investors still confuse it as a version of mutual funds. Are you someone who falls in any of these brackets? Then let us help you out in understanding what ULIP is all about.

What is ULIP?

A Unit Linked Insurance Plan (ULIP) is a curated insurance plan that combines the advantages of life insurance and an investment opportunity. The premium you pay for this policy is divided into two components, one forms the life cover while the other is invested in a portfolio of your choice that can comprise either equities, bonds or a mix of both depending on your needs and risk appetite. Even if your life goals and risk tolerance or the market situation change over time, ULIP allows you to restructure your portfolio through its fund switch option.

ULIP is not a mutual fund

A mutual fund is a pool of money invested by several investors, which is managed by a fund manager. The fund manager monitors the market and keeps investing the money in different financial instruments like bonds, equities and other asset classes to fetch returns. ULIP differs from a mutual fund on the following points.

• A ULIP is a combination of life insurance and an investment plan while a mutual fund is purely an investment option.
• A ULIP has a 5-year lock-in period while you can liquidate your mutual fund investment at any point.  
• A ULIP policyholder can switch funds at his/her wish but in the case of a mutual fund, it’s the fund manager, and not the investor, who decides the entry and exit.
• ULIP allows tax benefits under section 80C of the Income Tax Act, 1961¹  but no mutual fund (except ELSS) has this facility.

Know your ULIP

It’s important to understand the concept and offerings of your ULIP to make the most of it. Here’s a glance at it.

1. The difference between sum assured and fund value:

The sum assured in ULIP insurance deals with its traditional life insurance component. If a policyholder dies within the policy term, the family gets a pre-defined sum as the assured death benefit. This lump sum helps them to cope with the financial struggles of a sudden demise.

The fund value in a ULIP is the total worth of the investment made in a portfolio chosen by the policyholder. On any particular day, it is calculated as the Net asset value (NAV) of each unit, multiplied by the total number of units. The total valuation thus calculated is payable on maturity of the policy.

2. Different pay-outs

ULIP offers payouts on different occasions. They are:

• If the policyholder dies within the policy term, the higher the sum assured and the fund value is paid to the nominee.
• If the policy is surrendered within the 5-year lock-in period, a surrender value is paid which is basically the fund value after deducting a penalty.
• Upon maturity, the policyholder is entitled to receive the fund value.

Hope ULIPs now seem a less confusing financial choice!

Related Articles: 

• How to optimize your ULIP performance? 
• ULIP: A Good Investment Product Unfairly Judged For Its Charges 
• Understand how a ULIP calculator works
• Different Types of ULIP Funds in India
• 6 Tips to Maximize your Gains from ULIP 
• ULIPs - Must you invest in them?

ARN - ED/10/23/5929